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Comment by alex_duf | Hacker News Reader

> In a free market, rent will always be higher than cost of a property. If it were less, the property is an unprofitable investment and should be divested.

That's assuming you finance your property with debt and let someone else pay for your debt. If you either happen to own a property you don't use, or own the property you live in, it makes perfect sense.

You're describing everything that's wrong about the property market: owner expecting properties to magically create money out of someone else's labour.

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I’m not sure that’s anything other than math.

If I have a property and I decide to rent it, why would I rent it for anything less than the sum of my expenses plus a profit margin that will cover maintenance or repairs?

Why would anyone else? A rental property is just like any other business.

That's absolutely correct, my point was that once you've done the math - and assuming you are still paying a mortgage - it should give you a rent high enough such that no-one would agree to take it, unless you are willing to keep paying for part of it. It would therefore push the owner to either sell or stay in their property.

That's my blue-sky-point-of-view of the property market which doesn't reflect the reality, but I believe with enough people treating property as an investment rather than a personal need you end up in our current situation.

My personal view is that tax systems should compensate by being more expensive to own more properties than you need. (where to put a limit, I'm not sure)

The rent is higher but people will still take it for a lot of reasons. Inability to get approved for a mortgage, not wanting to deal with the sales process if you expect to move around a lot, etc.

I tried to sell my old house and despite being priced low just to get it sold, it sat on the market after we had already moved. We ended up deciding to see if we could rent it but weren’t sure how the process would go. In our area we didn’t see any home rentals listed except for a couple that were excessive (double what a mortgage would cost).

After months of not selling, we listed it for rent at a price I thought nobody would pay and it rented in 1 day, sight unseen. The renters insisted on paying a deposit as soon as possible because they didn’t want to lose the property.

For a first dip into the home rental market, I was shocked at how high the demand was.

Would you agree that when evaluating the housing market, we should take into account the full context of the decision to rent or buy, including the positives of renting and the negatives of ownership?

To reduce your losses.

Consider a landlord that stupidly overpays for a property. The market isn't going to cry about the landlord not being able to charge rent that covers their expenses.

The price is fixed by supply and demand. If you don’t want to rent it for anything less than X, what are you going to do if you don’t find anyone willing to pay that much?

Other people may want to rent their properties for less for multiple reasons, including that the sum of their expenses may be less than yours.

In any other business, it’s not necessarily the case that your revenue covers your costs. Unprofitable businesses exist (and may be even “expected” in cyclical sectors).

You could still rent for X where maintenance < X < maintenance+mortgage, because once the house is paid off, you start getting profit. It may be a risky plan, but if you don't need cash straight away, or if you bought the house to downsize in your future, it's not a terrible plan either.

> why would I rent it for anything less than the sum of my expenses plus a profit margin that will cover maintenance or repairs?

> Why would anyone else? A rental property is just like any other business.

You're absolutely right if your financial and strategical planning only sees up to the next quarter.

Let's say I look 10 years into the future. How does that change anything?

How much can real estate appreciate in 10 years again? (though it can definitely depreciate, but depends on its current situation).

Also its future value may depend on how you're renting it currently. (Or even if your overcharging for rent and the property is empty because you are waiting for "the perfect tenant")

You're also assuming buying and selling property is frictionless.

If your equity is negative it might be better (or even be the only alternative) to rent it at a below mortgage cost to have fewer losses.

Wait, I'm not sure what you're arguing here. The GP said that houses rent for expenses plus profit. I can't quite tell if he meant to delineate that to strictly rental income, but I understood it as meaning 'a land lord prices his property (the rent of a property, of course) so that he will make back his expenses, plus a profit, over the expected ownership time span'. So that includes things like expected appreciation, any tax benefits etc.

Is that what you are saying too? Because then there isn't much of an argument here :) I thought what you meant to say was that there is some factor other than financial that comes into play (or should come into play) when determining a rental price.

Housing is a consumable good, not an investment. That homes appreciate is a symptom that reveals the catastrophic government policies imposed on the market.

In a free market, homes would be very unlikely to appreciate in value. Indeed, they would be much more likely to depreciate as they degrade and fall technologically behind.

Should an airline let a seat fly empty, or accept a price that’s less than the cost plus profit of the seat?

That's a slightly different game, because the SAME airline sells hundreds (usually thousands) of seats per day, and there's a lot of signaling involved.

A route I (used to) fly frequently has two competing airlines, one of which raises the price towards the flight date even if they have free seats (they bank on you willing to pay a premium for a next-day unplanned flight), the other lowers the price towards the flight date if they still have free seats (they don't want to fly empty). The former does much better financially than the latter, although I cannot tell if that's the only reason.

But a house owner sells/rents out once in 5-10 years, and never to a repeat audience; So money is all that matters, signaling doesn't.

The general principle here is that, everything else being equal, if the marginal revenue exceeds marginal cost (i.e. revenue is greater than variable costs), you should make the sale. This is because you will lose less money than if you hadn’t made the sale.

Note however that airline pricing is notoriously difficult. There is no single price at which an airline may be flown profitably. It is an astounding achievement that the industry functions at all.

> That's assuming you finance your property with debt and let someone else pay for your debt. If you either happen to own a property you don't use, or own the property you live in, it makes perfect sense.

If you happen to own a property, but not use it, then you can either:

a) rent it out, or

b) sell it, and invest your proceeds according to your preferred risk/reward preferences.

In an efficient free market, for similar risk you get similar reward; So, if the reward for real-estate is 3% with essentially no risk, you're generally able to get the same thing by selling and putting the money in bank / low risk stock portfolio.

Alternatively, if you can't get 3% in other places, everyone will look to buy houses and rent them out (as an investment) in order to get those 3%. That's why the risk/reward profile equalizes across asset classes.

What GP was describing is basic math and economics. The existing state of ownership only matters in the sense that changing it introduces economic friction (ownership deduction, property transfer taxes, title transfer, realtor and lawyer fees, etc). Other than that, it's just math.

The concepts of “cost of capital” and “opportunity cost” account for the scenarios you describe.

Money has a price. If you want to borrow money, you pay interest. If you have uninvested money, you forego interest and suffer inflation. If you have investors’ funds, that has a cost too. The combined costs of your various sources of money are your cost of capital. Investments are only economically profitable if they make more than the cost of capital. It is quite common to earn an accounting profit but suffer an actual economic loss.

If you own property you don’t use, then, assuming you aren’t enjoying some offsetting non-pecuniary benefit, you are suffering an economic loss. You would be better off selling that property so that you can reallocate your capital to a productive purpose.

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